Money Managers Live

Advice on Investing in Long-term Bonds

photo by Shutterstock

Although bonds have become popular the past two years, our wealth managers advise investors not to put their money into long-term bonds because we believe investors could be hurt significantly if rates increase.

"It is our opinion that bond investors will be the next group of investors to get hurt," said Dave Young, President and founder of Paragon. "In the 2000 bear market, stock investors got crushed. Then, many of those same investors moved to real estate for protection and got beaten up again in 2008. Treasury bonds performed well the entire time. As a result, since the beginning of 2009, investors have put a net $620 billion into bond funds while they have withdrawn $100 billion from stock funds. This has pushed rates to all time lows."

Our portfolio managers claim that the current quantitative easing by the Fed may temporarily slow down increasing rates, but it won't stop them.

"Many bonds do not have near enough return to compensate for their downside risk," said Nathan White, Paragon's Chief Investment Officer. "With interest rates so low, we believe that investors will not find the safety or the returns they seek in most bonds."

Nathan said bonds have been in a 30-year bull market, which lulled investors into a false sense of security.

"Going forward, the returns that people will likely see in bonds will be very low at best or sharply negative at worst," said Nathan. "Unfortunately for bond investors, we believe it could be the negative scenario."

We advise investors to be aware of the maturities and quality of their bond holdings. We encourage investors to consider shortening the maturity of their bonds and adding high quality dividend stocks as an alternative.

About Paragon Wealth Management

Paragon Wealth Management is a wealth management firm that actively manages all types of traditional and retirement accounts such as IRA and 401(K) rollovers, and pensions and trusts. Paragon is a registered investment advisor and has fiduciary responsibility. Paragon received the Best of State Award in Financial Services in 2008, was listed on Wealth Manager Magazine's Top Wealth Managers List in the U.S. in 2008, received the Small Business of the Year Award in 2008, and was listed on WealthManagerWeb's Top Wealth Manager's list in 2010.

Paragon cannot guarantee the accuracy of information from other sources. Opinions are as of the dates indicated only. This report is not a solicitation for any security. Past performance is not a guarantee of future results. Investments in securities involve the risk of loss. Do not rely upon this information to predict future investment performance or market conditions. This information is not a substitute for consultation with a competent financial, legal, or tax advisor and should only be used in conjuction with his/her advice.

A Seesaw Market?

 

Photo by Hoyasmeg

Written by Dave Young, President of Paragon Wealth Management

As seen in Paragon's 3Qtr 2010 Print Newsletter

September is known as the worst month to be in the stock market.

At the end of August, many media outlets and TV talking heads ran stories about how bad this September would likely be. Investors moved money into bonds and gold and avoided stocks. Some of our clients called and asked to be taken out of the market purely because it was September.

What did the market do? Of course, it did what it had to do in order to cause the most grief to the majority. Since everyone expected it to go down... it went up. In short, we just had the strongest September since 1939. The S&P 500 gained nine percent for the month. Unfortunately, because of outflows into bonds and gold, many investors did not participate in the stock rally.

Overall, it was a seesaw quarter.

The markets were up sharply in July, down sharply in August and then up even harder in September. The back and forth movement has been more difficult than usual this year with the S&P 500 either gaining or losing at least four percent in each of the last five months. 

Those extreme up and down swings make our life much more complicated. When the markets are weakening, we make adjustments to protect ourselves. When they are strengthening, we make adjustments to prepare for upside movement. We have been stuck in this back and forth no man’s land since April.

We prefer trending markets. Either trend up or trend down, but just be consistent.

When the market is trending, it allows us to capitalize on the trend and ride it as long as it lasts. When it is whipsawing back and forth, we are forced to make constant adjustments, but it is difficult to make progress.  Effectively capitalizing on the trend is how we have significantly beaten the S&P 500 historically. 

So far, this year’s market action reminds me of 1994. The good news is that markets never swing back and forth like this forever. Eventually, they break out and move in one direction.

MANAGED INCOME AND TOP FLIGHT PERFORMANCE

Our conservative portfolio, Managed Income, has done well for the first three quarters of this year with a 4.8 percent return, net of fees. This has been a very challenging year for our conservative portfolio. With interest rates at extreme lows, it has been difficult to generate safe returns and still avoid the potential danger posed by increasing interest rates.

You might be wondering why potentially increasing interest rates are such a problem. If interest rates go up one percent, then a 10 year maturity bond will lose about 10 percent of its value. Likewise, an increase of two percent would create about a 20 percent loss and an increase of three percent would create about a 30 percent loss.

With interest rates at all time lows, many supposedly safe bonds are really ticking time bombs.

Investors have been piling into bonds in a big way. Since the start of 2009 investors have put a net $620 billion into bond funds while they have withdrawn $100 billion from stock funds. When rates do eventually go up, investors who ran to bonds for safety will be surprised to find themselves saddled with big losses they thought they were immune to. 

Most conservative funds simply buy and hold bonds. Those types of funds will likely get hurt when rates go up. In contrast, Managed Income attempts to own bonds when they have favorable risk/reward characteristics and avoid them when they are unfavorable. That is why this has been a challenging environment for Managed Income. We have been forced to pull returns from other conservative areas while avoiding the majority of corporate and treasury bonds. Managed Income has performed well year-to-date.

Our growth portfolio, Top Flight, has had challenges as well. It is at a virtual breakeven for the year, with a -0.4 percent return year-to-date. Its benchmark, the S&P 500, is up 3.9 percent year-to-date. Most of that lag in performance can be attributed to difficulty in two months, January and July. If you break it down further, it is the back and forth whipsaw characteristic of this year’s market that has made it difficult.   

We have spent a lot of the year adjusting and changing direction, right before the market reverses direction.

 As I mentioned earlier, at some point the choppiness usually ends and the trending begins. Unfortunately, we aren’t notified in advance when that will be. That is why we are forced to constantly adjust so that we will be in position to capitalize on the change in trend when it occurs.

Even though Top Flight has slightly underperformed through the third quarter,  we are not terribly concerned. Looking at the big picture, Top Flight has beaten the S&P 500 over the past three, five, seven, 10 and 12 year time frames (see complete track record and disclosures on Paragon's website, www.paragonwealth.com).

To be continued next week...

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from other sources Paragon believes this to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Dave Young Gave Investment Tips on PCTV

 

Dave Young, President and founder of Paragon Wealth Management, was a guest on Park City TV's Mountain Morning Show a few weeks ago. 

Karilyn Frazier, Park City TV's Mountain Morning Show Host, asked Dave several questions about where investors should put their money and which markets are doing well.

"At Paragon we make our decisions based on our quantitative models," said Dave. "Currently, Brazil, China, and the Pacific Rim are showing a lot of strength in our models. We suggest investors talk to a financial advisor before making decisions on where to put their money in the stock market."

Karilyn also asked Dave what investors should do if they have $100,000 and are not sure what to do with it. She asked Dave if investors should put their money in a CD.

"Each investor has a different situation," said Dave. "At Paragon, we determine each investors' risk tolerance level, their goals and objectives, and then help them create an investment strategy that is right for them. If five people came to us with $100,000, we would help each person differently."

Dave said if investors determine their risk tolerance and goals and objectives properly, they will be able to stay invested for the long-term.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from other sources Paragon believes this to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Not Again

 
photo by stevoarnold

Written by Dave Young, President of Paragon Wealth Management

When people find out I am in the investment business, they usually ask me where they should invest. They ask if it is better to be in stocks, bonds or real estate. They want hot tips like, are U.S. stocks better than international stocks? What about China and Brazil? Etc., etc.

Next, they tell me their horrible investment experiences. Typically, they are convinced that anything they invest in is destined for doom. This leads me to ask, "Why do the majority of investors have bad experiences?"

It doesn't help that for the past 10 years, the stock market and real estate markets haven't gone anywhere. After mostly going up during the '80s and '90s, the markets went down hard between 2000 and 2002. From 2003 through 2007, they did great. But, what came in 2008 to early 2009 was one of the worst bear markets in history, after which the markets rallied once again.

It's understandable investors have had it tough. However, studies have shown that the average investor did poorly during the good times, too. Historically, retail investors have underperformed horribly when markets are bad. No wonder investors are frustrated and disillusioned.

So, are people hard wired to invest in the wrong place at the wrong time? Yes. And I'll tell you why:  emotions. Most investors invest based on emotions, driven by a constant tug of war between fear and greed.

Will Rogers said investing is simple:  All you do is buy low and sell high. The problem is when prices are low, everyone is consumed with FEAR. And when people are afraid to invest, prices plummet.

The other side of the cycle is when markets have gone up. Investors tell their friends about the 20 percent return they got last year, and all of a sudden the 1.5 percent they got in their CD doesn't look so great. So then they, along with millions of other investors, come piling into the market consumed with GREED.

This cycle of fear and greed repeats itself over and over. Consider where the masses invested the past 10 years. Back in 2000, record numbers flooded the stock market right before a horrible three-year bear market hit. Investors in the NASDAQ watched their accounts lose 80 percent of their value.

Many of those investors said they would never invest in stocks again. So they piled into real estate to be safe. As we saw in 2008, it wasn't safe after all. Depending on which part of the country they were in, they experienced losses anywhere between 30 and 80 percent. Some leveraged real estate investors wiped out completely.

For the past year, we've seen investors piling into bonds. Bonds have been pushed to the lowest yields I've seen -- simply because everyone is buying them "to be safe." The bond bubble looks a lot like the previous stock and real estate bubbles. Odds are that investors who buy bonds for safety are about to get crushed.

At Paragon Wealth Management, we avoid emotional investing by following our quantitative models. We do not care what the media is saying or what we hope or how we feel. Our models process the market data and we invest accordingly. We constantly adjust our portfolios to what the market is actually doing.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

If it sounds too good to be true...

 
photo by Mundilfari

Written by Nathan White, CFA

I've had a few people lately inquiring whether certain annuity investment products that have been presented to them are a good deal or not. In light of the recent market volatility this product seems appealing. The conversation usually starts with a statement like this "I've had someone tell me that they can get a guaranteed fixed return or most of the gains if the market moves up." This seems like a no brainer - all upside and no downside!  Who wouldn't want such a deal? When evaluating products like these keep in mind the old saying "if it sounds too good to be true then it probably is." 

Because equity-indexed annuities (EIA) may seem so appealing, many fall victim to the sales tactic and then later feel significant buyers remorse when they experience the reality of these products. These annuities use complex formulas to determine what your gain is - if the market goes up, you actually end up getting significantly less than what it looks like on paper. In the end, no matter how much the market improves, all you may end up getting on average is a little more than what your minimum guaranteed return is. To make matters worse your money is locked up for years and the only way to get it out is to pay a hefty fee.  You basically get locked into a low returning investment. If a low return is all you need then maybe it is something worth considering, but you could probably buy a bond with a similar return and still have access to your investment should you choose.

Remember, beware of the investment advice from anyone selling you a product and get an objective opinion from an advisor with a fiduciary standard.

Click on the link below for more information on the pitfalls of EIAs.

http://www.guardingyourwealth.com/annuities/Equity-Indexed-Annuities.htm

 

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

 

Investing is like a baseball game

photo by laffy4k

Written by Dave Young, President of Paragon Wealth Management

Imagine yourself as a baseball player.

First, your team gets a base hit, next you get a double. Then, another base hit. This is followed by a triple, and then you strike out. Then, you strike out twice in a row! Just about the time you are ready to abandon your team, they hit two home runs.

The moral of the story is you never know how the game is going to turn out unless you stay for the whole game. 

When investors see the returns our growth portfolio, Top Flight, has generated over the past 12 years, they get excited about them.

Then, when the market goes through a downturn, and Top Flight goes through a mild downturn, they start questioning their investment strategies.

Paragon's Top Flight Portfolio has generated a total return of 351.1 percent versus 39.2 percent for the S&P 500 from January 1998 through May 2010. (see www.paragonwealth.com for full track record and disclosures.) 

It is important to understand the ups and downs that investors went through in order to capture those extraordinary returns investors have seen since Top Flight's inception in 1998.

Its also important to understand that investors who did not keep a long-term perspective and bailed out of their portfolios along the way, never saw those returns.

It is only those investors who had the discipline to keep a long-term perspective who got the long-term returns.

For example, in three of the past 12 years, which is 25 percent of the time, Top Flight underperformed the S&P 500. In two of those years, Top Flight declined and investors lost money.

The investors who focused on the short-term during those times, bailed out of their portfolios. They were shaken out of their long-term investment strategy and ultimately hurt themselves by selling out of their portfolio.

In an ideal world Top Flight would always outperform and would travel a straight line of positive returns year after year. 

Unfortunately, we do not live in a perfect world. Reality is more like two steps forward and then one step back over and over.

With Top Flight we never know in advance when we are going to under perform the market or when we are going to "hit a home run." Although there are no guarantees, we do believe that if we keep stepping up to the plate and executing our investment strategy that we are going to outperform more than we under perform. Over time we believe that disciplined execution of our investment strategy will deliver outsize results. 

However, that means we have to keep stepping up to the plate, and we have to consistently follow our investment strategy.

That is how Top Flight has generated returns almost nine times more than the broad market as measured by the S&P 500 over the past 12 years.

If investors want those long-term returns, then they must "stay for the whole game". 

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Summer Rally?

photo by Steve aka Crispin Swan

Written by Nathan White, CFA

The markets often take a breather during the summer as people focus on other things besides economics.

June and July are often lackluster months.

After the recent correction the "sell in May and go away" idea seems to have been right on the mark; or does it? The "sell in May and go away" tactic has gained widespread acceptance because it generally worked from 1950 to about 2003 according to a recent article by Louis Navellier (http://www.thestreet.com/story/10752020/1/sell-in-may-and-go-away-no-way.html).

Perhaps we should have said "sell before May" this time around. In fact, selling during May this year might end up being exactly the wrong thing to do.

The recent causes for the market turmoil (i.e., flash crash, European debts woes, Gulf oil disaster, new Israeli-Palestinian tension) have been masking increasingly good economic reports that show the economy continuing to recover.

I always believe that the market loves to continually disappoint as many as it can.

Now that the recent turmoil has caused investor sentiment to reach extreme pessimistic levels, and with a general belief that the summer is a bad time for the markets, perhaps the market will do the opposite of what is generally expected, and have a nice rally.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Do you know your Investment Risk Tolerance?

photo by Fayj 

Written by Dave Young, President of Paragon

A 20-year study by Dalbar concluded that between 1987 and 2007 the average investor only earned 4.5%. During that same period of time the S&P 500 returned 11.8%. We all know it is tough to make money during bad markets. But why, even during the best of times, do the majority of investors suffer from poor performance?

One of the reasons is that they don't stick with their investment strategy during difficult markets. When markets go up, investors are attracted to the market and stay invested easily. When the market starts to go down, most investors still stay invested. It's usually after the market has fallen significantly that panic sets in and investors bail out. They usually bail out close to the bottom right before the market starts to rebound. This pattern repeats itself over and over with the result being that most investors are constantly buying high and selling low.

If your investment risk tolerance is set too low, you won't generate the returns you should. If it is set too high, when market conditions become difficult, you will likely sell your investments and miss out on superior long-term returns. Setting your risk tolerance and then aligning your portfolio with it allows you to reduce your portfolio volatility to a level that you can live with.

Before you invest, you need to ask yourself how you will react if your portfolio drops five percent. What about 10 percent? What about 20 or 30 percent? At what point would you want to sell out of your investments and run for the hills?

Once you answer that question, then your portfolio should be invested so you never hit the point that will force you to sell at the market lows. That will allow you to follow your investment strategy over the long-term and be invested when the best opportunities present themselves. It will also allow you to generate the best possible returns over the long-term.

Over my 23 years of wealth management experience, I believe that determining your risk tolerance is one of the most important steps an investor should take.

If you are married, both you and your companion should take the questionnaire and compare the results. Since identifying your tolerance can be difficult, Paragon Wealth Management created a short risk tolerance questionnaire to simplify the process.

Click on the link below to complete a short questionnaire to help you identify your investment risk tolerance.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Thoughts on Market Forecasts

photo by bratha

Written by Dave Young, President of Paragon

Clients who have been with us for years know we are not big fans of market forecasts, whether they are made by us or anyone else.

Let me tell you why I believe so strongly.

There's no shortage of self-proclaimed market prophets. You can find them in investment magazines, newspapers or CNBC. Although they can be entertaining, they provide no real investment value. They do not help anyone make money. In fact, investors who follow them are more likely to lose money than to gain it.

The way the forecasting game works is that the market guru, seer, pundit or executive continually makes forecasts in an attempt to gain public attention. By sheer luck maybe half of these predictions are proven right-meaning at least half of them are wrong. On the occasions when the forecast turns out to be correct, the forecaster plays it up. The numerous forecasts that do not pan out (and those many investors who are financially hurt by them) are never spoken of again.

In truth, you're much more likely to get an accurate prediction of the future by listening to the weather forecasters. At least they inflict less damage when they're wrong.

So if forecasts are a waste of time, what does work? After 23 years of managing money, I am convinced that investors will only succeed when they are able to remove emotion from the investment process. Gut feelings are not a reliable investment strategy-even the gut feelings of so-called experts.

Oftentimes, successful investing requires you to act in a way that is contrary to what you "feel" is right. For example, several of our models measure the overall optimism or pessimism in the investing public. When optimism is high we know there is a lot of risk in the market and it's likely that the market will decline. Likewise, when optimism is low and most investors think things are really bad, that is usually a great time to invest. This pattern has repeated itself for years.

All of our investment decisions at Paragon are based on solid, proven models, not hunches. Our portfolio allocation models tell us how much we should be invested based on measured risk in the market. We run the models daily to determine the most effective percentages of investments and cash holdings.

Once we are in the market, our portfolio focus models tell us where we should be invested. We constantly track all areas of the equity markets on both a macro scale (small cap, mild cap, large cap, value, growth, international and emerging markets) and a micro scale (individual industries, sectors and countries).

The bottom line for Paragon Wealth Management's clients is that they can be confident that their portfolio isn't being managed by some celebrity market fortuneteller. Our quantitative models enable us to impartially measure what is actually happening in the market and how much risk there is at any point in time. We constantly evaluate the models to determine how effectively they are working. In my opinion, this is one of the best ways to invest for long-term success.

The moral of the story is that forecasts make interesting conversation and trivia. Just don't use them to try to make money.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Investment Planning For 2010

photo by vogliovento

With the New Year upon us it is a good time to reflect on the lessons learned from this past year.  With the state of the economy at the beginning of 2009 would we ever have been able to anticipate or predict how the year would end?  Or can we possibly know what 2010 will bring?  Of course not.  One of the biggest lessons we can take away from 2009 is the importance of having and sticking to a long term investment plan.  Factors influencing the economy will inevitably vary from year to year but implementing a long term investment strategy will ensure we are not influenced by the fear and emotion of the moment and keep our end goals in sight.

Happy New Year from all of us at Paragon Wealth Management.